When a company becomes insolvent it means that it is no longer able to pay its debts. It can be a distressing time for directors and employees but it is important to remember that there are several formal and informal options available, which aim either to rescue the business or provide an orderly wind down.
Insolvency companies can be defined by a number of factors, such as cash flow problems, declining production or rising debt levels. These can be caused by external factors, such as a reduction in demand or an increase in production costs or internal, such as poor financial control.
An insolvency companies is unable to meet its financial obligations, such as payments to suppliers or debt repayments to creditors. In addition, it may have been placed on the insolvency register and the directors could face personal liability for the company debts.
It is often difficult for a director to recognise insolvency signs, as they can be obscured by the day-to-day running of the company. However, there are a few key warning signs to look out for. These include difficulty paying suppliers, bounced cheques and a significant rise in debt levels.
There are a number of ways to deal with an insolvent company, but it is important that you seek advice as early as possible. An insolvency practitioner can help you to review your position, identify the cause of the problem and formulate a plan to save your company.
You should also consider whether the company has any assets that can be sold to recoup some of its outstanding debt. These assets can be identified through a balance sheet test or an asset sale process. The balance sheet test compares the value of all future and contingent liabilities against the total value of all current assets. If the liabilities are greater than the assets, then your company is insolvent.
The liquidation of a company is a last resort for insolvent companies, but if your company has reached this point it is important that you seek immediate advice. The process is called a Creditors’ Voluntary Liquidation (CVL) and requires an insolvency practitioner to manage it. This involves identifying and selling the company’s assets with the proceeds being distributed to the creditors of the company.
If you have paid for goods or services, made a deposit or paid on a credit card from an insolvent company then you are an unsecured creditor and are entitled to claim your money back through the insolvency process. It is important that you contact your credit card company as soon as possible to make a claim, as there are typically conditions and time limits on making claims. Employees also fall into this category and are owed their entitlements. If your employer goes into administration you can find out more about your rights as an unsecured creditor from the administrators. The administrator will usually publish details of the insolvency process on an online insolvency register.